Does Starpharma Holdings (ASX:SPL) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Starpharma Holdings Limited (ASX:SPL) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Starpharma Holdings

What Is Starpharma Holdings's Debt?

The image below, which you can click on for greater detail, shows that at June 2023 Starpharma Holdings had debt of AU$4.78m, up from AU$4.00m in one year. However, it does have AU$35.2m in cash offsetting this, leading to net cash of AU$30.4m.

How Strong Is Starpharma Holdings' Balance Sheet?

According to the last reported balance sheet, Starpharma Holdings had liabilities of AU$14.5m due within 12 months, and liabilities of AU$2.80m due beyond 12 months. On the other hand, it had cash of AU$35.2m and AU$8.24m worth of receivables due within a year. So it can boast AU$26.1m more liquid assets than total liabilities.

This luscious liquidity implies that Starpharma Holdings' balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Starpharma Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Starpharma Holdings will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Starpharma Holdings had a loss before interest and tax, and actually shrunk its revenue by 18%, to AU$4.2m. We would much prefer see growth.

So How Risky Is Starpharma Holdings?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Starpharma Holdings had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of AU$14m and booked a AU$16m accounting loss. But the saving grace is the AU$30.4m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 3 warning signs with Starpharma Holdings (at least 1 which is potentially serious) , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.